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Insolvency and employment law: an irreconcilable conflict in large-scale redundancies?

This article was first published by The Gazette and the full article can be found online here.

Alan Bennett, Partner, and Bethany Parr, Paralegal, explain the law applicable to collective redundancy in insolvency situations, and consider the arguments for and against reform in light of the Insolvency Service's recent consultation.

The legal requirement to consult employees about potential redundancies is of particular importance where an employer is facing insolvency and the law is not always entirely clear.

The response to the Insolvency Service's recent ‘Collective Redundancy Consultation for Employers facing Insolvency’ also highlights a tension between employment law and insolvency law when collective consultation requirements are triggered. In light of this, it may be time for the government to consider if and how meaningful consultation can truly be achieved in all insolvencies.

Key legal requirements for collective redundancies

Section 188(1) of the Trade Union and Labour Relations Consolidation Act 1992 (TULRCA), which implements the European Collective Redundancies Directive (Directive 98/59) (‘the Directive’) into UK law, provides that an employer's duty to consult employee representatives is engaged if they are proposing to make 20 or more employees redundant at one establishment within 90 days.

Where the duty is triggered, section 188(4) TULRCA prescribes certain information which employers must provide to employee representatives.

Section 188(1A) provides that consultation must begin 'in good time' before the redundancies take effect and that the first dismissal should not made until at least 30 days (for 20 to 99 redundancies) or 45 days (for 100 or more redundancies) have passed since the consultation began. While the CJEU has yet to consider the meaning of 'in good time' when called upon to interpret the directive, recent national decisions suggest that the tendency is to work backwards from the date of the first dismissal and consider whether consultation began sufficiently far in advance of that date.

Section 188(2) provides that employers are required to consult ‘with a view to reaching agreement’ on ways of avoiding dismissals, reducing the number of dismissals and mitigating the effects for those involved. Case law indicates that sufficient information should be provided to allow ‘meaningful consultation’ to be effected (MSF v GEC Ferranti (Defence Systems) Ltd (No.2) [1994] IRLR 113).

Section 188(7) provides for a ‘special circumstances’ exception whereby an employer need not comply in full with the above duty. In such cases, it is sufficient for the employer to take all such steps towards compliance as are reasonably practicable in the circumstances. For our purposes, case law has determined that insolvency does not of itself amount to a ‘special circumstance’.

The consultation responses

As a result of recent tribunal findings highlighting a need for consultation on collective redundancies in the context of insolvency, the Insolvency Service issued a call for evidence. The public consultation ran for 12 weeks from March to June 2015, and the 28 responses were published on 20 November 2015.

Key inhibitors to 'meaningful consultation'

While the Insolvency Service maintains there is no conflict between insolvency and employment law, it nonetheless recognises the strong perception amongst the vast majority of respondents that tensions exist.

82 per cent of respondents expressed a view that, once a business is in significant financial distress and an Insolvency Practitioner has been appointed, meaningful consultation with employees becomes impossible to achieve. At this late stage, there may be little or no alternative to redundancy, insufficient funds to continue paying employees, and time is of the essence, particularly if there is hope of turnaround. Specifically, respondents felt that it was impossible to comply with S188(2)(a) and (b) of TULRCA (above).

78% of respondents felt that a desire to retain confidentiality, particularly on the part of directors, can inhibit consultation, as there is a feeling that information disclosure could prejudice prospects of rescue or the value of the business.

Many respondents expressed a view that insolvency should constitute ‘a special circumstance’, thus reducing the burden on directors and IPs.

The consultation period

A number of responses demonstrate misinterpretation of the legal requirements. In particular, there was a belief among 60 per cent of respondents that there is some form of statutory or fixed period for consultation when, in reality, the requirement to wait at least 30 (or 45) days after the commencement of consultation before making the first dismissal says nothing about how long consultation must last.

Despite these views, 79 per cent of respondents recognised that collective consultation has its benefits, not least that it gives employees time to adjust to the changes. However, a large proportion qualified their response by stating that such benefits are limited where a business faces terminal insolvency proceedings. One of the key facilitators of consultation, expressed by 60 per cent of respondents, was ‘sufficient time’; a factor that is often simply not present in insolvency.

In light of the consultation, the government has confirmed that it will consider further options to clarify the legal requirements and improve sanctions for non-compliance – although the government will always be constrained by the requirements of the directive (however unclear they may be). It is yet to be seen whether this will lead to formal amendment to the law or practical guidance, be that in the format of a SIP or otherwise, but R3 has expressed its disappointment that the government has failed to provide workable solutions at this stage.